Don’t put that GIC in your TFSA

Transferring it simply isn’t worth the effort

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From the November 2015 issue of the magazine.

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Q: Can I transfer a small locked-in GIC, which is about to mature, into a TFSA?

—D. Godfree, Toronto, ON

A: Why on earth would you want to do that, I ask with tongue firmly planted in cheek.  Surely it isn’t because you hope the long arms of the Canada Revenue Agency won’t try to tax the interest on the GIC. Well, whatever the reason behind your question, here is the answer: Most GICs can be transferred into your TFSA, but the requirements differ depending on which financial institution you’re working with. For example, “If the GIC is solely issued by one particular institution or division of that bank, then it is not transferable,” says Tim Raposo, Senior Financial Planner, TD Wealth Financial Planning. But even if you can do it, are you sure it is worth the effort?

You’ll need to track and report the interest you earned during the time the GIC was outside of the TFSA. Raposo explains that, “if you opened a GIC in January and kept the money invested in the GIC until October, but then decided to transfer the money into a TFSA in November, you would need to report the interest that was accrued from January to October on your tax return.”  Your bank won’t likely issue a T5 for that period because the GIC matured inside your TFSA, so you’ll need to haul out your calculator. I’m a big fan of simplicity, and for a small amount, I would keep it simple and just wait until the GIC matures.

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2 comments on “Don’t put that GIC in your TFSA

  1. What happened to simple math. Does anyone know how to multiply and add anymore. It is not that difficult. For example, a $5000 GIC at 2.5% that was invested on March-22-2015 and the TFSA transfer was complete on September-15-2015.

    Just do simple math, first find the total number of days from March-22-2015 to September-15-2015. March 31-22=9 days, April 30 days, May 31 days, June 30 days, July 31 days, August 31 days, September 15 days, 9+30+31+30+31+31+15=177 days total.

    Take $5,000*2.5%=$125,00 total annual interest divide by 365 days comes to $0.342465753*177 total days equals $60.62. Depending on your tax bracket or marginal tax rate, it can cost as low as 20.05% to 50% maybe higher. Most people that are working full time are paying around 31% so $18.79 in income taxes.

    It may mot be worth if is a small amount and less than say 1 or 2 months remaining, 10 to 11 months already passed to maturity but what about if it is for 1 or 2 months in the term and for $25,000. Using the same 2.5% GIC but for $25,000 TFSA in kind contribution and 45 days, it would be a noticeable tax bite waiting until maturity.

    The taxable interest waiting until maturity would be $547.95 and assuming 31% tax rate, total extra income taxes would be $169.86 waiting until maturity.

    For RRSP’s this is even worse because you delay getting your income taxes reduced or income tax refund which in this case will be $7,750 at a 31% income tax bracket or marginal tax rate plus have to pay $169.86 in more income taxes.

    Another valid important point is people don’t know or think about getting an RRSP loan or borrowing money to put money into an RRSP, RESP, RDSP, TFSA or other registered accounts costs interest that is not tax deductible and is also higher than the GIC is paying costing more interest than being earned from your GIC.

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  2. In my case, I already had higher interest compounding investments with 4.213% yields to maturity. I put those government strip bonds right away when the TFSA was first introduced and put in place in 2009.

    A $12,000 investment when transferred had $450 in compound interest for the year that I had to pay income taxes and also an $800 capital gain but the rest of the interest of $18,000 until maturity would be a real tax saver, probably $6,000 or so.

    This is the main reason I never transferred any of my 2.85% to 3.15% 5 year GIC’s into a TFSA.

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